According to the latest BofA Merrill Lynch February Fund Manager Survey (163 participants with $510BN in AUM responded), active managers finally got reacquainted with gravity and were not happy with the experience, or as BofA puts it, investor anxiety is palpable, "but does not give the all clear to buy the dip."

Here are the survey highlights:

A record one-month jump in net % of investors indicating they have taken out protection against a sharp fall in equity markets in the next 3 months, at net -30% in February from net -50% in January

Fund managers are rotating into cash and out of equities, reducing risk and cyclicality

Average cash balance rises to 4.7% this month, up from 4.4% in January. To rise in FMS cash rose to 4.7% (avg = 4.5% past 10 years) moves BofA's FMS Cash Rule back into a contrarian "buy" signal. Meanwhile, BofAML Bull & Bear remains in "sell" at 8.4 with cash not rising sharply enough to cause a drop below the 8.0 "sell" signal threshold.

Allocation to equities fell to net 43% from net 55% overweight, the largest one-month decline in two years; allocation to bonds now at a record low of net 69% underweight

Respondents indicate this S&P bull market will peak on average at 3100

An inflation-induced bond crash (45%) remains at the top of the list of tail risks cited by investors; the top three are rounded out by a policy mistake by the Fed/ECB (18%) and market structure (13%)

Long FAANG+BAT (26%), Short USD (20%) and Short Volatility (18%) are considered the most crowded trades

A majority of investors surveyed (70%) now believe the global economy is in the “late cycle,” the highest level since January, 2008

Only 5% of fund managers surveyed say global interest rates will be lower in the next year; 80% expect them to rise

A record net 24% of investors surveyed say global corporate balance sheets are overleveraged; the net percentage that would like to see companies return cash to shareholders remains close to 2009 lows

"While this month’s survey shows that investors are holding on to more cash and allocating less to equities, neither trait moves the needle enough to give the all clear to buy the dip," said BofAML chief investment strategist Michael Hartnett, who at the end of January correctly predicted the early February swoon.

Below are Hartnett's extended observations:

• Close but no Buy the Dip from FMS: BofAML Feb FMS cash & portfolio de-risking show anxiety, but most FMS metrics indicate "pain trade" remains lower asset prices driven by stronger US$, hawkish central banks, and slowing global growth.
• Bulls not Bears: FMS sentiment nudges BofAML Bull & Bear Indicator down from 8.5 to 8.4, i.e. remains in "sell" territory, suggesting likely test of recent market lows.
• Asset allocators blinked: FMS cash level up to 4.7% from 4.4%, record 20ppt jump in protection-buying and a steep 12ppt drop in equity allocation...note FMS history shows monthly 16ppt drop in allocation required to signal a risk asset rout complete.
• Bonds crash the party: 60% say Inflation & bonds most likely catalyst for cross-asset crash (#2 was US/EU corporate bonds @15%), bond allocations cut to lowest since 1998, REIT exposure cut to 6-year low; top 3 "crowded trades"...#1 long FAANG/BAT, #2 short US$, #3 short volatility; strong US$ & lower yields would be painful.
• Thinning macro ice: 91% say recession "unlikely" & FMS investors remain long cyclicals (tech, banks, energy, EM, EU, Japan); defensives continue to be shunned despite 70% say "late-cycle" (highest in 10 years); ebbing BofAML FMS Macro Indicator indicates global stock price levels still high.
• BTD, FOMO, TINA dependent on EPS: FMS investors most bullish on profits since 2011, strong EPS most likely positive risk for stocks, and confirm cyclical outperformance to date; interest rate catalyst slowly reversing, leaving EPS as lone driver for risk assets.
• Best contrarian trade: long Utilities, short Banks (68% hit ratio when FMS bank-utility sentiment this stretched)